Option Pricing For GARCH-Type Models With Generalized Hyperbolic Innovations

In this paper, the authors provide a new dynamic asset pricing model for plain vanilla options and they discuss its ability to produce minimum mispricing errors on equity option books. Given the historical measure, the dynamics of assets are modeled by Garch-type models with generalized hyperbolic innovations and the pricing kernel is an exponential affine function of the state variables, they show that the risk neutral distribution is unique and implies again a generalized hyperbolic dynamics with changed parameters. They provide an empirical test for the pricing methodology on two data sets of options respectively written on the French CAC 40 and the American SP 500.

Provided by: Centre pour la Communication Scientifique Directe Topic: Innovation Date Added: Aug 2010 Format: PDF

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